5 Alpha Picks Following 4Q17 Results

The 4Q17 earnings season ended two weeks ago with largely uninspiring results. According to CIMB, companies missing the mark outweighed those that beat expectations by 15 to seven. Sectors like shipyards, aviation and telecommunications showed disappointing results.

CIMB: Earnings Starting To Bubble

According to CIMB, corporates are still grappling with costs and kitchen-sinking. Noteworthy earnings setback came from all three telcos as the industry continued to be grappled by higher costs. Large caps in the capital goods sector like Keppel Corp, Sembcorp Marine and Sembcorp Industries also used 4Q17 to clean up its books with impairments.

Notable Results From 4Q17

That being said, there were still some positive surprises coming from Singapore companies. DBS’s windfall dividend in its golden jubilee was the most pleasant surprise in 4Q17. On the other hand, the most notable earnings beat was Best World, which made a comeback with improved sales from China as Chinese export agents pre-stocked ahead of Chinese New Year. Apart from the positive surprises, the earnings upgrade for the overall Singapore market was mainly held up by banks and manufacturing companies.

Investors Takeaway: CIMB’s 5 Alpha Picks For FY18

Moving forward, CIMB believes that capital goods, banks, gaming, property developers, technology and manufacturing continue to be the sectors to invest in. To better position for FY18, CIMB recommends three criteria to screen for alpha picks: Earnings growth, share price correction and valuations. Using its three criteria, here are the five alpha picks from CIMB.

1. Sembcorp Marine

Sembcorp Marine is CIMB’s pick as a pure proxy for the O&G sector’s potential upswing. Following improvement in its order inquiries recently, CIMB is forecasting higher orders expectations for Sembcorp Marine in FY18. CIMB also notes that higher-than-expected order wins in FY18 can catalyse its share price.

BUY, TP $3.01; Current share price: $2.07

1. AEM Holdings

AEM Holdings (AEM) is the sole supplier of test handlers to its key customer, which is currently in a full commercial ramp of its product offering. AEM’s recent acquisitions of Afore and Iris Solution will soon pave the way for AEM to reduce its reliance on one key customer and develop new growth engines for the company. With its balance sheet in a net cash position and strong free cash flow generating abilities, CIMB anticipates larger-sized acquisitions or a higher dividend payout ratio in the near future.

BUY, TP $8.19; Current share price: $7.16

1. mm2 Asia

mm2 Asia has been increasing its media presence regionally and across the entire value chain from production to distribution of films. Apart from a steadily growing production business, investors can also expect higher contribution from subsidiary UnUsUal as it develops more concerts in North Asia and adds a new product line “Disney on Ice”.

BUY, TP $0.76; Current share price: $0.52

1. China Sunsine

China Sunsine is a prime beneficiary of the consolidation in the rubber chemicals industry amid pollution curbs in China. With capacity expansion and average selling price expansion, China Sunsine should see a double-digit growth in earnings in FY18. With its current valuation of 8 times forward price-to-earnings (PE), CIMB believes that China Sunsine is significantly undervalued as its peers are trading at 12 times forward PE.

BUY, TP $1.62; Current share price: $1.46

1. Venture Corporation

Over the past few years, Venture Corporation (Venture) has transformed itself from a price-taking contract manufacturer to the preferred manufacturing partner of its clients. CIMB foresees Venture to continue to deliver 21 percent year-on-year core earnings per share growth in FY18F with better margins and product launches from its customers. Its strong net cash balance sheet and recent capex suggest that Venture still has room for growth.

BUY, TP $30.81; Current share price: $28.51